Are Traditional Recruitment Agencies Still Good Value?

British companies spent approximately £26 billion on recruitment last year. A very large chunk of which was spent with Recruitment Agencies. In this blog post, we’re asking whether clients are still getting value from this, or whether we’re moving towards a tipping point.

It can’t be denied that traditional agencies are still making a good deal of money. Even in the current economic climate, they still seem to be bringing in big bucks. Case in point: last year it was estimated that the top ten UK agencies made a combined total of £1 billion. The major question here is whether they deliver the value to back up these huge fees.

The main reason that we believe that recruitment needs to change is quite simply that the environment around it has changed. Up until 2001 a major cost of recruitment was print advertising. This was a massively overpriced cash cow for the publishers – but there was no established alternative for agencies to acquire candidates for their clients. In turn, the agencies then had to pass on these costs directly to the client.

In the time since 2001, however, online job boards have risen greatly in effectiveness and scale. Their arrival meant that many more jobs were being advertised, but also that the reach of that advertising was much greater. Not only had it become dramatically easier to find candidates – it was also much cheaper.

These days, approximately 80% of candidates that are sourced by recruitment agencies come from online job boards. (Though this exact percentage varies a little by industry, the trend of the relationship between online and sourcing is inescapable). This means that the cost for agencies of finding candidates have plummeted – but we don’t believe that this has been reflected in agency fees.

As a result in the drop in costs, many agencies were able to reduce the efforts that they had previously spent in keeping their own databases up-to-date and clean. Agencies have gained from their savings in data handling and management. For an example of this, think about the outcry there was when online jobs board Reed.co.uk announced that they were going to begin charging for advertising jobs online. Until that point they had a policy of it being free, and many recruitment businesses relied solely on this to find candidates.

Another way in which the recruitment agency’s claim of a unique proposition has been further undermined is through the rise of the online CV database. When so much information about candidates is available direct to businesses, can agencies really sustain such high fees?

This leads us to the really fundamental question: in the new age of recruitment what value are traditional agencies able to add?

They might claim that their value lies in the following areas;

• They have access to a database of candidates – This is far less true than it used to be, and in fact online jobs boards often have much greater reach and profiles.
• They take greater pains to understand clients and their needs - This is true to a degree, but many progressive clients are getting much better producing their specification.
• They manage an advertising process – Again, this is true to an extent but tools like Broadbean are starting to undermine this claim. The recruitment advertising agencies also are very active in this space and would have a better claim to campaign management than the recruitment agencies.
• They sift and filter applications and save time for their clients in doing so – Agencies can no longer claim that this is a unique feature, as many online services are doing this as well; including ID Talent.
• They meet candidates to ensure a cultural match – The truth is that very few agencies actually do this. A large percentage of the industry see the CV as a ’product’ rather than a person, and won’t do much more than a swift phone call to the candidate before offering them to the employer.

In an earlier blog we covered why companies use recruitment agencies, but there is a real risk that those agencies are not producing the value commensurate with their high fees. In fact, because the agency model tends to be tied to a percentage of fees, they are largely immune to inflation. So not only have their costs reduced dramatically, their core fees have risen with inflation.

With these points in mind, one would expect that the recession would drive more companies to look for alternative approaches. And one wouldn’t be wrong; Diageo have recently announced that they are moving to direct recruitment models and therefore reducing their agency spend my 70%. Many other forward thinking companies are commencing the same type of reviews.

We predict that agency margins will come under threat and alternatives, such as ID Talent, will come to be seen as the obvious choice.